Rationalising an unwieldy portfolio to take a conviction approach

"The last adviser was good but I began resenting paying 1.3 per cent a year to his company and the platform from our savings," says Chris. "I worked out that over the next 10 years I would be paying over £100,000 compared with about £8,000 by doing it myself. We moved to Trustnet Direct and the costs are about 0.1 per cent a year. The move was painless although it took about 12 weeks, and should save us £9,000 a year.

"Originally, our investment objectives were saving, but now it is to ensure we have enough in retirement to have a good lifestyle and help our three adult children. We have bought one child a flat, and helped the second one move to a larger house. And I am sure we will help the third child when she reaches the point of wanting to settle down.

"I will receive a retirement lump sum of £150,000 in the autumn and I'm wondering how to invest this. Options I am considering include bond funds, equity funds, more Vanguard Life Strategy funds or premium bonds.

"We have maximised tax relief by transferring funds between my wife and myself, and each year put these into our individual savings accounts (Isas). With the changes in the pension rules we are considering leaving our Standard Life additional voluntary contribution scheme and self-invested personal pension (Sipp) untouched so they pass on to the children.

"My Standard Life additional voluntary contribution scheme is worth £200,000 and I have an inflation-linked NHS pension of £50,000 which starts in 2015. My wife's Sipp is worth £50,000 and she has an inflation-linked NHS pension of £10,000 which starts in 2019.

"I am tracking the Morningstar GB Aggressive Allocation portfolio model which seeks to provide both capital appreciation and income by investing in three major areas: stocks, bonds, and cash. These portfolios tend to hold larger positions in stocks than moderate-allocation portfolios, with typically 70 per cent to 90 per cent of assets in equities, and the remainder in fixed income and cash.

"Because we could live for another 35 to 40 years I have not moved out of equities into cash and bonds. I also feel a degree of protection from my inflation-linked pension.

"My most recent trades include selling Fidelity Multi Asset Strategic Fund (GB00B3WFXL57), CF Miton Defensive Multi Asset Fund (GB00B0525B66) and Old Mutual Corporate Bond Fund (GB00B1XG8T67). I also sold units of JPM US Equity Income (GB00B3FJQ045) worth £24,000, of AXA Framlington American Growth (GB00B5LXGG05) worth £15,000 and of Invesco Perpetual Income (GB0033053827) worth £17,000.

"I have recently invested £70,000 in the Vanguard Life Strategy 60% Equity Fund (GB00B3TYHH97), £10,000 in Fidelity China Special Situations (FCSS) and £10,000 in New India Investment Trust (NII).

"I feel that despite the ups and down of the current months, Asia will become dominant in the next few years so it is important to be invested there. I have the following funds on my watch list:

•Threadneedle China Opportunities (GB00B1PRWF12)

•HSBC MSCI China ETF (HMCH)

•Advance Frontier Markets Fund (AFMF)

•db X-trackers FTSE Vietnam UCITS ETF (XFVT)."

Chris and Jill's portfolio

Patrick Connolly, certified financial planner, Chase de Vere, says:

You and your wife will have secure and inflation-proof income through your NHS pensions. This puts you in an advantageous position when it comes to taking risk in your investment portfolio, particularly if the income is enough to meet your living costs.

If you are in good health you could live for another 40 years. This should be reflected in your investments. While some capital protection is necessary, it is important to take investment risk to generate real returns and counter the long-term eroding effects of inflation.

If it isn't required, I agree with leaving the additional voluntary contribution scheme and Sipp money in these tax-efficient wrappers. This money could eventually be passed to your children free of inheritance tax and, if you die before age 75, free of any tax.

How to improve your portfolio

Chris Dillow, Investors Chronicle's economist, says:

I'm puzzled. You decided not to pay for financial advice but you are heavily invested in some high-charging funds.

I'll concede that this isn't necessarily irrational. Maybe it is not worth paying for financial advice - at least, in your circumstances - but it is worth paying for fund managers' expertise. This, though, would only justify investing in a few very special funds where the managers offer a good chance of outperformance. But you are not doing this. Your fund holdings are so diversified that any one manager's expertise - assuming it exists at all - is diluted away.

This means your portfolio looks like a tracker fund, with a few biases towards different segments, but without the tracker fund's low charges.

To illustrate my point look at your equity income funds. The biggest holding in Invesco Perpetual Income (GB0033053827) is Reynolds American (US: RAI), which is also Newton Global Income's (GB00B0MY6T00) biggest holding. And Invesco Perpetual Income has big holdings in BT (BT.A) and Imperial Tobacco (IMT) - as do Artemis Income (GB00B2PLJH12) and Aviva Investors UK Equity Income (GB00B6R52478).

There is a strong case for investing in big high-yielding stocks. Many of these are defensive and tend to do better over time. But I'm not sure what the case is for investing in several funds that hold the same stocks. If you want to hold a diversified basket of income stocks you can do so at lower cost through iShares UK Dividend UCITS ETF (IUKD).

I personally would base my equity holdings around a general tracker fund, either UK or global, and then ask what I should add. The answer might include specific market segments such as income stocks or emerging markets or, if you insist, one or two top fund managers. A scattergun holding of actively managed funds, however, isn't so sensible.

On the basis of this, you can guess what my advice is on how to invest your lump sum in the autumn: go for a simple global tracker ETF, perhaps as part of an autumn cleaning of your portfolio. The autumn is also is often a good time to buy equities.

I have no complaint with your general asset allocation. Many readers might believe this portfolio has a high equity weighting. I'm not sure it does. A £50,000 index-linked pension has a capital value of almost £2m. If we count this among your financial assets - and I can't see what else it is - your equity exposure amounts to only around 25 per cent of your wealth.

This doesn't mean you should shift more into equities: there is always a case for holding cash, especially when inflation is low, simply to protect us from market falls. But it poses the question: what is the point of bond funds?

Sure, they might protect you from some types of stock market risk, because bonds often hold up when shares fall. But this is by no means guaranteed. And you can get protection against market risk - should you want it - with cash.

It's also the case that bond funds should protect us from cyclical risk, because they should do well in recessions. But being retired means you aren't exposed to such risk.

If it is secure returns you want, I suspect that direct holdings of gilts - held to maturity so that returns are certain - might be better than bond funds.

Patrick Connolly, certified financial planner, Chase de Vere, says:

You hold many good quality funds. However, my guess is that some have been held for a long time and then new funds have been added. Having 45 separate holdings is unwieldy, making it difficult to have a real understanding of your overall asset allocation.

You have 16 funds worth less than £10,000. You should amalgamate these so you own nothing worth less than £10,000. You should then monitor the funds so that you understand how much you have in each asset class, sector or region. Your current portfolio has £180,000 in UK equity income funds alone and this doesn't include exposure through other UK, global or tracker funds.

Your portfolio is predominantly in equities and fixed interest. Western stock markets have performed strongly in the past six years and many fixed-interest investments look expensive. To diversify risk you could increase the property weighting from 6 per cent to between 10 and 15 per cent, and include other assets. While I'm not a fan of the Targeted Absolute Return sector, it does house some good defensive funds such as Kames UK Equity Absolute Return (GB00B4XS8040).

In terms of new money, you should leave in cash anything you might need in the short term to help out your children.

Beyond this, there is an argument for increasing exposure to Asia and emerging markets. The portfolio is currently skewed heavily to western markets. These have performed well while emerging markets have lagged, but the long-term growth story of the emerging markets remains intact and at some point this trend will reverse.

I would recommend broad-based Asian and emerging markets funds rather than specialist funds. To demonstrate the lottery of investing in individual countries, in 2014 the Indian market rose 32 per cent, while Russia fell 42 per cent. In 2013, Brazil fell 17 per cent but China rose 2 per cent. I suggest funds such as Aberdeen Asia Pacific Equity (GB00B0XWNG99), JPM Emerging Markets (GB00B1YX4S73) and Standard Life Investments Global Emerging Markets Equity (GB00B8B02G41).

Lee Robertson, chief executive officer, Investment Quorum, says:

Looking at your portfolio and your stated attitude towards risk, tracking the Morningstar GB Aggressive Allocation portfolio model, I would make the following suggestions.

Your portfolios are currently worth £810,000 and have around 45 positions. The portfolios are perhaps over-diversified and we feel many of the positions are too small to add any real value.

We would therefore suggest that you restructure and consolidate the portfolios reducing the number of holdings to no more than 35, and ideally nearer to 25. This would allow you to have some conviction in your investment decisions given that you are an aggressive investor.

A conviction investment position typically has weightings of 5 to 7 per cent within each holding, whereas an average investment position typically has a 3 to 5 per cent weighting.

We are currently in the seventh year of a mature bull market and very recently markets have been showing some real signs of fatigue. Unfortunately, there may be some further difficult weeks ahead given that there is so much uncertainty surrounding Greece, China, and the tightening of interest rates in the US and the UK. However, rate rises might be delayed until the first quarter of the New Year if the global economy shows further signs of a slowdown.

We suggest you consolidate your portfolio by considering the sale of the following:

M&G Global Dividend Fund
Aviva Investors Property Trust
Aviva Investors UK Equity Income Fund
Invesco Perpetual Corporate Bond Fund
First State Global Emerging Markets Fund
Fidelity Index UK Fund
HSBC FTSE 250 Index
Newton Global Income Fund
Schroder UK Mid Cap Fund
Legg Mason IF WA Global Multi Strategy Bond Fund
Threadneedle European Select Fund
HSBC European Index
Invesco Perpetual Income Fund
Jupiter Merlin Growth Portfolio Fund
M&G Optimal Income Fund
F&C UK Smaller Companies Fund

These suggestions are based upon asset classes and funds moving out of favour in the current environment. We suggest that you consider conviction positions in the following funds on the same rationale over the medium to long term.

Fundsmith Equity (GB00B41YBW71)

Neptune UK Mid Cap (GB00B909H085)

Old Mutual UK Equity Income (GB00B1XG9151)

CF Miton UK Value Opportunities (GB00B8QW1M42)

Franklin Templeton UK Managers' Focus (GB00B7MPWT49)

Man GLG Continental European (GB00B0119487)

BlackRock Continental European Income (GB00B3Y7MQ71)

Baring Eastern Trust (GB00B85JKH42)

Baillie Gifford Japanese (GB0006011133)

Artemis Global Income (GB00B5N99561)

When investing the cash lump sum of £150,000 we suggest that you follow your current strategy but adopt the fund changes we have outlined.

At the current time bonds do not look that attractive, given that interest rates and inflation are likely to rise in the not too distant future. If you want to increase your weighting towards bonds then we suggest only short duration paper, which will not be unduly impacted by higher interest rates, and some index-linked bonds to counteract any increase in inflation over the coming years. Despite market difficulties we continue to favour equities over bonds.

Your question about Premium Bonds is very relevant as it is likely that you will hold, or wish to hold, cash. Premium Bonds are a very good proxy for cash up to the allowable limits. They would diversify your existing holdings and are easy to access so you can help your other child if necessary.

We have a preference for global and domestic equity income funds, especially those that consistently grow their dividend yield. We also like funds that demonstrate a conviction approach towards stock-picking, and think that index funds and trackers may have a more demanding time ahead.

*None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.